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Stock Strategist

Beware Eroding Moats in This Fast-Changing Industry

We've reassessed the competitive advantages of our telecom equipment firms.

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At Morningstar, we think and write extensively about the economic moats of the more than 2,000 stocks we cover. Indeed, it is one of our central tenets that companies with moats (sustainable competitive advantages) will be able to derive economic value from those moats and that such value should be reflected in our fair value estimates. As such, we are vigilant about detecting emerging moats for up-and-coming companies and eroding moats in changing industries.

Recently, we spied a few companies in the rapidly evolving telecommunications equipment group that seemed to be suffering from eroding economic moats. Our long-standing view on moats in much of this group had been based on the extremely sticky relationships these firms had with the telecom service providers (carriers). Along with the long-term relationship, once a carrier picked an equipment firm for a network build-out--and designed the equipment into the network's backbone--additional business typically followed.

John Slack does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.